Curves Holdings (7085 JP)

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Curves Holdings (7085 JP - US$407 million) is a Japanese fitness chain that dominates the niche of serving elderly women. It was part of karaoke bar operator Koshidaka before being spun off in 2020. It has about 2,000 locations in Japan, most of which are franchisees that pay royalties to Curves.

Curves Fitness was invented by Americans Gary and Diane Heavin of Waco, Texas in 1992. In the early 2000s, Koshidaka executive Takeshi Masumoto travelled to the United States, was impressed by the fitness chain, and wanted to bring the concept to Japan.

In the following 20 years, he built a Japan franchisee operation for Curves. In 2018, eventually acquired the global franchisor that controls most markets outside of the United States and Oceania. And finally, Koshidaka spun off Curves in 2020, hoping it would flourish as a stand-alone entity.

Unfortunately, this was right before Japan entered a COVID-19 lockdown that decimated the demand for fitness services. The number of club memberships fell from 822,000 to just 600,000.

That said, Curves is still outperforming the industry. It’s been taking market share from traditional full-service gyms like Renaissance and Central Sports. And women universally love the service, with Google Review scores consistently above 4.5/5.0. The churn is minimal at just 2.4%. I’ve been investing in Japan for a long time, and I’ve never seen customers as enthusiastic about a service as they are about Curves.

Part of the attraction is how safe women feel at Curves’ gyms. The company targets elderly women who are not good at exercising but want to stay in shape as they age. They feel supported by friendly instructions that help them with diet advice, a feeling of community, and more. The fact that men are not allowed into the gyms also helps them feel safe.

It’s also well-established that spun-off entities tend to outperform the average company. It signals shareholder orientation and better aligns interests between management and minority shareholders. Takeshi Masumoto is a talented individual, and I’m hopeful he’ll perform better on his own than under the weight of the larger Koshidaka organization.

We’re also seeing a strong recovery from COVID-19. As of September 2023, the number of members reached close to 800,000 - more or less the same as before COVID-19. And the revenues/members are significantly higher, thanks to greater sales of merchandise, including protein powder, to the clubs’ members (about half of the group revenues).

I would characterize Curves as a GARP stock (growth at a reasonable price). The stock trades at 1.9x forward-looking EV/Revenues. If you agree that operating margins will likely return to around 20%, then the EV/EBIT will end up close to 10x and the P/E in the low double digits. Curves Japanese peers trade closer to 21x P/E.

Prior to COVID-19, management guided for an expansion of about 100 outlets per year, which would imply 5% volume growth. But merchandise sales are also helping to push revenue per member higher. In addition, two new products will be launched in FY2024, one diet-related and the other an entirely new product line.

I also think there’s significant growth potential outside Japan. For example, Curves only has about 150 locations in Europe, compared to 2,000 in Japan. And customer reviews for Curves gyms in Europe are just as positive as in Japan. It’s also worth noting that when Curves acquired the global franchisor Curves International, it paid JPY 34 billion for it - roughly half of the current market cap.

The largest risks I’m seeing are related to renewed outbreaks of COVID-19 and further social distancing restrictions. Investing in franchise operations can also be tricky because we don’t know how profitable the franchisees are. It looks like Curves subsidized part of their advertising expenditures during COVID-19, at least, suggesting some stress.

But in any case, Curves trades at a reasonable valuation of around 10x EV/EBIT on a normalized basis, and I think there’s significant growth potential, especially overseas. It’s also encouraging to see a management guide for “full-scale multi-store expansion” in the near-term future.

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